Conal Gregory: Stock market will outshine the high street 'piggy bank'

This year is likely to see the UK stock market end at its highest level for the past 12 months. Shares are up 10 per cent – a rise of 14 per cent if dividends are included – while house prices on Halifax's index are static.

Yet short-term saving is usually unwise, partly because investment decisions take time to show their potential and for the administration expenses involved. Over five years, shares again have been the place to be – up 7.7 per cent – but not property, which has dropped 1.8 per cent.

The cumulative effect of sitting tight on a successful stock market holding can be shown by how far the increase over five years has jumped if dividends are included. Instead of 7.7 per cent growth, your money would have risen by 29.8 per cent.

Placing money into a bank or building society savings account is to watch its value erode. The best no-notice account pays only 1.9 per cent or – with a temporary bonus included – 2.75 per cent or 2.9 per cent via the internet.

Yet inflation is running at 3.3 per cent if the consumer prices index is taken or 4.7 per cent on the basis of retail prices. The increases in VAT and energy costs in January are likely to raise these rates further.

Already this year Mervyn King, Governor of the Bank of England, has had to write four times to the Chancellor to explain why inflation is galloping ahead of the Bank's two per cent target. His letters will continue as the Bank consistently misjudges inflation.

Yet the UK economy is heavily reliant on very low interest rates as companies reduce their debt. Savers have never lived through such a sustained time for low interest and particularly below the rate of inflation. Holding cash on deposit at a derisory rate is not a sensible option.

Global growth is likely to be four per cent in 2011 – broadly in line with its long term average. Currency wars are likely to make the crystal ball cloudy to read in places as governments continue to devalue their money in a short-term move to stimulate growth. China, for instance, is keeping the yuan artificially weak to gain a trade advantage.

In such circumstances, some turn to gold as a metal which cannot be debased by creating more. Its price hit a record high (US$1,421 per troy ounce) in nominal terms in 2010 but there could be further to go. In real terms it is well below its 1980 peak.

After reviewing their portfolio, investors need to look across the world as well as by sector. They should also consider the vehicle to be used, such as a collective fund or index, both to reduce charges and the risk element.

Investment trusts, which really form the first modern savings collective, saw growth on average rise 17 per cent this year – seven per cent above the FTSE 100. Part of such performance is down to their ability to borrow money when a good investment opportunity presents itself.

In world terms, 2010 experienced only moderate growth and 2011 should see the start of more sustained expansion. Both the US and UK outperformed Europe and China.

The UK will have to stand the impact of public spending cuts but may achieve 2.5 per cent GDP. However, manufacturers are now benefitting from the competitive level of sterling. Many firms quoted here are truly global. Indeed, the FTSE 100 generates 70 per cent of its profits from overseas.

Mid-caps will deliver the best performance, even though Old Mutual's prediction of 15 per cent profit growth may seem a shade optimistic.

The US shows a lack of reform and a spending policy that is out of control. There has been disproportionate quantitative easing (money printing). Barack Obama will probably be a one-term President and the Republicans are unlikely to be a success story, although Schroders forecast 3.1 per cent GDP.

Europe is still reeling from sovereign debt, notably in Greece and Ireland. The bitter medicine is working. Exposure to strong economies like Germany will reap good rewards, as will those who take the long view with Portugal.

Emerging markets are likely to be the main shining star. The world's largest democracy, India, looks likely the safest haven. Its large caps have returned over 18 per cent in the first 11 months whilst its mid-caps have jumped 26.4 per cent over the same period.

By sector, commodities look attractive. They will benefit by a rise in inflation as "robust growth in the developing world puts pressure on energy, food and other commodity prices," according to Scottish Widows.

UK property though is not the place to be. Values will fall although bricks and mortar offer a stable income, which is likely to be over six per cent.

In summary, the stock market is the place to be invested next year. It will remain volatile whilst diversification and good advice are essential. The balance of risk and good growth outshine the piggy bank on the high street.

Read Conal Gregory in the Yorkshire Post every Saturday.

Conal Gregory is the Yorkshire Post's personal fnance correspondent.